Top Stock Trading Strategies and Styles for Today’s Market

There are about as many ways to trade stocks on the market as there are stocks – from day trading to buy-and-hold and other strategies. Not all are created equal, and the one you choose really depends on your preferences. It pays, though, to have a basic understanding of all the major trading strategies used today so you can find the ideal way forward for you.

Here, I’ll cover a few top stock trading strategies and styles in use today, including their advantages and potential drawbacks.

Day Trading

Day trading – or the act of making frequent trades during the course of a day or week instead of holding onto a stock for the long-run – is not really a strategy as much as it is a style. With day trading, instead of traditionally buying a stock and holding onto it for a year or more so it can appreciate in value, you are looking to take advantage of daily fluctuations in the stock’s price and profit off of the difference.

The Securities and Exchange Commission has a standard when it comes to day trading: if you execute four or more day trades within five business days, you are considered a “pattern day trader” and are required to have at least $25,000 in our account at any given time.

This trading style is built around getting in and out of positions in a particular stock quickly, benefiting from volatility in the stock’s price. The most successful day traders can enter into a position, trade, and then get out before the market closes and the position is carried over to the next day, which protects you against price drops after the closing bell.

Day trading is time-consuming, stressful, and costly for many, but is often the fastest way to turn a profit with the market.

Buy and Hold

Buy and hold is a style that is basically the opposite of day trading. Instead of moving in and out of stocks repeatedly to build up wealth over a short period of time, you literally buy a stock and hold it – sitting on it until it decides to grow.

People who flock to this style believe that in the long run, the stock market will give you a good return for your money. In the short term, there’ll be price fluctuations, volatility, and dips – these will be smoothed out in the long run and won’t really harm you if you pick good, solid stocks with great potential and value.

There is something called the efficient-market hypothesis, which basically states that since all stocks are fairly valued (thanks to an efficient market) then trading stocks repeatedly is fruitless and it’s better to research, pick good stocks, and hold onto them for years.

Penny Stocks

Penny stock trading is a style of trading that focuses on extremely small-capitalization stocks with prices less than $1.00 per share. You can achieve very rapid gains (and losses) through penny stock trading because the slightest fluctuation can net considerable returns. Plus, shares are cheap.

Of course, you have to be careful with this; volume is shaky at best for penny stocks, which means you can be left holding the bag with tons of cheap shares that aren’t going anywhere and are tough to sell. Plus, price manipulation runs rampant. But, trading penny stocks does enable investors to get into the stock market for pennies on the dollar – literally.

Swing Trading

Swing trading is a major strategy that focuses on timing the up-and-down price swings that are common to virtually every stock on the market. Swing traders create rules and triggers based off metrics and analytics and try to roughly estimate when a stock’s price will be low enough to buy and high enough to sell or short. Positions are usually held for longer than a day but far shorter than months or years.

The big defining characteristic of swing trading is the “system” a trader creates. It’s basically a set of rules; if Stock X does this, this, and this, I’ll buy. If it hits this target, I’ll sell, or short. The risk? You could miss out on a bull market, or hit a bear market and take considerable losses. But the control and semi-automated feature of swing trading is appealing to some. Day traders may not prefer this type because they are averse to holding positions overnight.

Other types of swing trading include trend trading, which tries to follow the market’s current direction, and range trading.

Momentum Trading

Another major strategy is momentum trading. This strategy relies on following the momentum in the market, such as tracking stocks that are moving quickly in one direction on high volume. The goal is to get on the stock and ride the wave of momentum while others are on the same wave – and hopefully profit.

News, rumors, and stock market buzz play a big role in momentum trading. You want the “hot stock”, the stock that everyone seems to be talking about and is making waves in the market on that day. The biggest technical tool to do that is the momentum indicator, a technical metric on a stock chart that gives you the strength of a price movement. If the momentum indicator is positive, the stock is on the rise; if it is negative, the stock is falling.

CAN SLIM

CAN SLIM is a strategy for growth stock investing that has been around since the 1950’s. The inventor, William J. O’Neil, created CAN SLIM as a way to pick companies that have solid fundamentals and are undervalued, then buy stock in them before they make big gains.

He created a seven-step process to spot these growth stocks over the long term:

Current earnings: Current earnings per share should be at least 25%

Annual earnings: Should be at least 25% in each of last three years; annual returns on equity should be at least 17%

New product or service: The company should be coming out with a new product or service to drive interest and increase revenue

Supply and demand: A lot of demand but not very many shares available. Low debt-to-equity ratios are key

Leader or laggard?: Pick stocks that are leading their industries. The Relative Price Strength Rating gives an idea of if the stock is overperforming the industry

Institutional sponsorship: How many mutual funds are involved in this stock?

Market indexes: Try to invest when there are uptrends in the Dow Jones, NASDAQ, and S&P 500 indices.

Does CAN SLIM work? O’Neil apparently made hundreds of millions with this long-term strategy, so there must be some truth in its methodology.

Which trading strategy is the best one for you? That depends on your needs and risk profile. If you’re an aggressive, risky, and action-oriented trader, day trading may be for you. If you want to go the long-term route with solid fundamental growth-based analysis, CAN SLIM could be yours. And if you prefer something in between, you might want to try swing or momentum trading.

The best solution is to experiment and find the one that works best for your needs.